Are ‘pre-nups’ worth the paper they are written on?

People often question whether Binding Financial Agreements are actually binding, or whether they are too easily set aside by a court to risk relying upon.

This question is significant. Binding financial agreements (BFAs) have broad application, not just as traditional ‘pre-nuptial agreements’, but also to enable married and de facto couples to agree during their relationship about what would happen to their assets if they were to separate, and for separated couples to document any property settlement agreement they have negotiated.

Beyond these uses, BFAs are also used in estate and succession planning, to ensure that particular assets (often actual or prospective inheritances) are quarantined and retained by one spouse in the event of a relationship breakdown. This can be useful to ensure that family assets or business interests are not diluted when spouses separate.

Where do the pitfalls lie?

BFAs are intended to be useful, cost effective instruments that deliver a degree of certainty to spouses about what will happen to their assets if they separate. In the absence of a BFA, that decision is left to the court. Can Binding Financial Agreements be relied upon?

There are a number of precedent cases dealing with the setting aside of BFAs that are worth considering, and this article explores two in particular.

B & B – technical compliance with the Family Law Act

The Full Court in B & B [2008] FamCAFC 7 made it clear that strict technical compliance with the requirements of section 90G of the Family Law Act was necessary to avoid a BFA being set aside. The rationale was that, in circumstances where the effect of the BFA is to effectively oust the Court’s jurisdiction to make an order for property adjustment (division of matrimonial property following separation), there was no room for anything less than full compliance with the technical requirements of the Act.

Blackmore and Webber – fraud, duress and unconscionability

In Blackmore and Webber [2009] FMCAfam 154, the Federal Magistrates Court considered whether a BFA entered into prior to a marriage could be set aside either:

• because of a failure to comply with the formal requirements of section 90G (essentially the same argument as in B & B);
• under section 90K(1)(a) because it was obtained by fraud (including non disclosure of a material matter);
• under section 90K(1)(b) because it was obtained under duress; or
• under section 90K(1)(e), because the husband’s conduct was unconscionable.

The circumstances of this case were that:

• The wife arrived in Australia on a student visa in mid-2001.
• The parties lived together from late 2002 until mid-2003 when the wife returned to Thailand because her visa had expired.
• The couple became engaged and the husband sponsored the wife’s return to Australia in mid-2004 on a fiancée’s visa, the terms of which required the couple to marry by January 2005.
• The wife fell pregnant in July 2004.
• The parties entered into a Binding Financial Agreement on 11 November 2004 and married on 14 November 2004. On 16 November 2004 the wife (in accordance with plans made prior to the marriage) returned to Thailand to visit her family.
• The parties separated in April 2007.

Technical compliance?

Unlike the result in B & B, in this case, the Court found that the parties had complied with the technical requirements found in section 90G of the Act.

Non-disclosure of a material matter?

In a previous case, Stoddard & Stoddard [2007] FMCA Fam 735, the Court held that in the context of section 90K(1)(a), the omission of material matters constituted fraud, even in the absence of deliberate deception.

In B & B, the information disclosed in the BFA by the husband about his assets and liabilities was deficient. The Court accepted that the husband had provided a complete list of his assets and liabilities to his solicitor, but his solicitor included an incomplete list within the BFA. The husband did not query the omission and the value of his assets was understated in the document.

As in Stoddard and Stoddard, the Court found in this case that an intention to commit fraud was not necessary, and that in the context of a BFA, the mere failure to disclose all assets was sufficient to constitute fraud. Accordingly, the BFA could be set aside on this ground.

Duress?

The Court went on to make findings about whether the BFA also could have been set aside under section 90K(1)(b) for duress, as argued by the wife.

In considering duress, the question for determination is whether the pressure applied by one party to the other, to compel them to take an action, goes beyond what the law considers legitimate.

The Court accepted that the wife had consistently maintained her opposition to signing the agreement, and that the matter had not been seriously discussed from the time the wife returned to Australia in mid-2004 until about five days before the planned wedding on 14 November 2004.

The circumstances by then were that the wife was pregnant, unmarried, and facing expulsion from the country if she was not married by January 2005. It was accepted by the Court that the husband had told the wife that ‘the marriage is off’ if she did not sign the BFA. Compounding the situation was the fact that two days after the planned wedding, the wife was scheduled to return to her family, in circumstances where she had anticipated being married, but would be returning to her family unmarried and pregnant if the marriage was cancelled.

In those circumstances, the Court accepted that the ‘pressure placed on the wife by the husband to sign the agreement was “illegitimate” ‘. Therefore the Agreement could also be set aside on that basis.

Unconscionability?

Section 90K(1)(e) of the Act allows the Court to set aside a BFA where one party’s behaviour has been unconscionable. Unconscionability arises where one party suffers a ‘special disadvantage’ and that disadvantage is taken advantage of by the other party.

In Blackmore and Webber, the Court found that the wife’s situation (pregnant, with limited English skills, facing expulsion from Australia and the prospect of returning to her family unmarried) did place her at a special disadvantage.

The husband argued that he could not have acted unconscionably given that the wife had legal advice before signing the BFA. The Court did not accept this argument.

The Court’s view was that in circumstances where the husband was aware of the wife’s unwillingness to sign the BFA, to produce a document for signing five days before the wedding and indicating that the wedding would not go ahead unless it was signed, did represent unconscionable conduct. The Court held that the husband had taken advantage of the dire outcome for the wife if she did not sign.

Conclusions

It is tempting to draw conclusions that the results in both B & B and Blackmore & Webber suggest that entry into a binding financial agreement is a risky strategy. However, what these cases highlight are the pitfalls of not properly complying with the technical requirements of the Act, and of attempting to enter into a binding financial agreement with anything other than good faith and candour.

It is important to remember that the effect of a binding financial agreement is to oust the Court’s jurisdiction to adjust a couple’s property following a relationship breakdown. Accordingly, binding financial agreements must be carefully and accurately drafted, and parties must approach entry into an agreement with full disclosure of all relevant circumstances, avoiding duress and unconscionability, in exactly the same way as for any other important agreement of a contractual nature.

We’ve developed a series of short videos about binding financial agreements that look at what makes an agreement binding as well as some of the advantages, disadvantages and potential loopholes.